Enterprise Financial(US:EFSC)2023-10-26 16:00PART I - FINANCIAL INFORMATION Financial Statements The company's total assets grew to $14.03 billion as of September 30, 2023, a 7.4% increase from year-end 2022, driven by a 9.0% rise in total loans. Net income for the nine months ended September 30, 2023, was $149.5 million, up from $143.0 million in the prior-year period, primarily due to higher net interest income. Total deposits increased by 10.0% to $11.91 billion, with a notable shift from noninterest-bearing accounts to interest-bearing accounts. Shareholders' equity increased to $1.61 billion Condensed Consolidated Balance Sheets As of September 30, 2023, total assets reached $14.03 billion, an increase from $13.05 billion at December 31, 2022. This growth was primarily fueled by an increase in total loans, net, which rose to $10.47 billion from $9.60 billion. Total deposits grew to $11.91 billion from $10.83 billion, while total liabilities increased to $12.41 billion. Shareholders' equity also saw an increase, reaching $1.61 billion Condensed Consolidated Balance Sheet Highlights (Unaudited) (in thousands) | (in thousands) | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $14,025,042 | $13,054,172 | | Total cash and cash equivalents | $370,698 | $291,359 | | Total loans, net | $10,474,687 | $9,600,206 | | Total Liabilities | $12,413,162 | $11,531,909 | | Total deposits | $11,909,907 | $10,829,150 | | Total Shareholders' Equity | $1,611,880 | $1,522,263 | Condensed Consolidated Statements of Income For the third quarter of 2023, net income was $44.7 million, a decrease from $50.2 million in the same period of 2022. For the nine months ended September 30, 2023, net income increased to $149.5 million from $143.0 million year-over-year. The year-to-date improvement was driven by a significant rise in net interest income to $421.9 million, which offset a higher provision for credit losses and increased noninterest expenses. Diluted EPS for the nine-month period was $3.91, compared to $3.73 in the prior year Income Statement Summary (Unaudited) (in thousands, except per share data) | (in thousands, except per share data) | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $141,639 | $124,290 | $421,860 | $335,068 | | Provision for credit losses | $8,030 | $676 | $18,552 | $(2,734) | | Total noninterest income | $12,085 | $9,454 | $43,273 | $42,289 | | Total noninterest expense | $88,644 | $68,843 | $255,583 | $197,067 | | Net income | $44,665 | $50,200 | $149,530 | $143,042 | | Diluted EPS | $1.17 | $1.32 | $3.91 | $3.73 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash provided by operating activities was $189.3 million. Net cash used in investing activities was $918.7 million, primarily due to a net increase in loans. Net cash provided by financing activities was $808.8 million, largely driven by a net increase in interest-bearing deposits. This resulted in a net increase in cash and cash equivalents of $79.3 million for the period Cash Flow Summary for Nine Months Ended September 30 (Unaudited) (in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $189,252 | $187,857 | | Net cash used in investing activities | $(918,698) | $(912,124) | | Net cash provided by (used in) financing activities | $808,785 | $(552,546) | | Net increase (decrease) in cash and cash equivalents | $79,339 | $(1,276,813) | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, investment portfolio composition, loan portfolio credit quality, and derivative activities. Key details include a diversified loan portfolio of $10.6 billion with an Allowance for Credit Losses (ACL) of $142.1 million. Nonperforming loans increased significantly to $48.9 million. The investment portfolio totaled $2.2 billion, with unrealized losses primarily driven by interest rate changes. The company uses derivatives to hedge interest rate risk on its loans and debt - The company adopted ASU 2022-02, which eliminates guidance on troubled debt restructurings and enhances vintage disclosures, without a material effect on the financial statements30 Loan Portfolio Composition (in thousands) | (in thousands) | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial and industrial | $4,449,129 | $3,859,964 | | Real estate (Total) | $5,886,315 | $5,635,473 | | Other | $286,953 | $248,990 | | Total Loans | $10,616,820 | $9,737,138 | Allowance for Credit Losses (ACL) on Loans Activity (Nine Months Ended Sep 30, 2023) (in thousands) | (in thousands) | Amount | | :--- | :--- | | Balance at December 31, 2022 | $136,932 | | Provision for credit losses | $14,766 | | Charge-offs | $(13,451) | | Recoveries | $3,886 | | Balance at September 30, 2023 | $142,133 | - Nonperforming loans (excluding government guaranteed balances) increased to $48.9 million at September 30, 2023, from $10.0 million at December 31, 202253 - The company has off-balance-sheet commitments to extend credit totaling $3.13 billion as of September 30, 202373 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 9.0% loan growth in the first nine months of 2023 to strength in C&I and specialty lending. Net interest margin (NIM) for Q3 2023 was 4.33%, a 16 basis point decrease from the linked quarter due to rising deposit costs, but up 86 basis points year-over-year. Nonperforming assets rose to 0.40% of total assets, driven by specific commercial loan downgrades. The company maintains a strong liquidity position with $4.7 billion in available sources and capital ratios exceeding 'well-capitalized' levels. A key risk highlighted is the potential for eroded customer confidence in the banking system following recent industry events Executive Summary The company reported net income of $44.7 million for Q3 2023, with diluted EPS of $1.17. For the nine months ended September 30, 2023, net income was $149.5 million. Key balance sheet movements include a 9.0% increase in total loans to $10.6 billion and a 10.0% increase in total deposits to $11.9 billion since year-end 2022. Asset quality metrics showed an increase in nonperforming assets to 0.40% of total assets. The tangible common equity to tangible assets ratio stood at 8.51% Key Performance Metrics | Metric | Q3 2023 | Q2 2023 | Q3 2022 | | :--- | :--- | :--- | :--- | | Diluted EPS | $1.17 | $1.29 | $1.32 | | Return on average assets | 1.26% | 1.44% | 1.51% | | Net interest margin (tax equivalent) | 4.33% | 4.49% | 4.10% | | Nonperforming assets to total assets | 0.40% | 0.12% | 0.14% | | ACL on loans to total loans | 1.34% | 1.34% | 1.50% | - Total loans grew by $879.7 million (9.0%) to $10.6 billion at September 30, 2023, compared to December 31, 2022111 - Total deposits increased by $1.1 billion to $11.9 billion at September 30, 2023, from year-end 2022. Noninterest deposit accounts represented 32.3% of total deposits111 Results of Operations Net interest income for Q3 2023 was $141.6 million, a slight increase from the linked quarter, with a tax-equivalent NIM of 4.33%. The NIM compression was due to a 51 basis point increase in the cost of interest-bearing deposits, which outpaced the 16 basis point rise in loan yields. Noninterest income fell to $12.1 million, mainly from a loss in tax credit activities. Noninterest expense rose to $88.6 million, driven by a $4.0 million increase in deposit costs related to specialized deposit businesses Net Interest Income and Margin Analysis (in thousands) | Metric | Q3 2023 | Q2 2023 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income (in thousands) | $141,639 | $140,692 | $421,860 | $335,068 | | Net Interest Margin (tax equivalent) | 4.33% | 4.49% | 4.50% | 3.64% | | Total Cost of Deposits | 1.84% | 1.46% | 1.42% | 0.18% | - Noninterest income decreased by $2.2 million from the linked quarter to $12.1 million, primarily due to a $3.0 million decrease in tax credit income (loss), partially offset by a $1.5 million gain on sale of SBA loans127128 - Noninterest expense increased by $2.7 million from the linked quarter to $88.6 million, mainly due to a $4.0 million increase in deposit costs associated with specialized deposit businesses132 Financial Condition Total assets grew by $970.9 million to $14.0 billion since year-end 2022, driven by an $879.7 million (9%) increase in loans, particularly in C&I and specialty lending. Deposits increased by $1.1 billion, with a notable shift from noninterest-bearing demand accounts (down $790 million) to interest-bearing accounts like money market and CDs. Nonperforming loans increased to $48.9 million from $10.0 million at year-end, primarily due to additions in commercial and industrial and commercial real estate loans. Estimated uninsured/uncollateralized deposits decreased to 29% of total deposits from 55% at year-end 2022 - Total loans increased by $879.7 million (9%) to $10.6 billion since Dec 31, 2022, driven by growth in C&I ($589 million), sponsor finance ($253 million), and life insurance premium financing ($111 million)142 - The Allowance for Credit Losses (ACL) on loans to total loans ratio was 1.34% at Sep 30, 2023, down from 1.41% at Dec 31, 2022, due to improved economic forecasts and charge-offs of impaired loans149 Nonperforming Assets (in thousands) | Category | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonaccrual loans | $48,746 | $9,766 | | Total nonperforming loans | $48,932 | $9,981 | | Total nonperforming assets | $55,865 | $10,250 | | Nonperforming assets to total assets | 0.40% | 0.08% | - Total deposits grew $1.08 billion since year-end 2022, with a significant mix shift: noninterest-bearing demand deposits fell by $790 million, while interest-bearing demand, money market, and CD accounts grew155 - Estimated uninsured/uncollateralized deposits decreased to $3.4 billion (29% of total deposits) at Sep 30, 2023, from $5.9 billion (55%) at Dec 31, 2022, largely due to increased use of reciprocal deposit programs159 Liquidity and Capital Resources The company maintains a strong liquidity position with total available sources of $4.7 billion as of September 30, 2023, including borrowing capacity from the Federal Reserve and FHLB, and unpledged securities. Shareholders' equity increased by $89.6 million since year-end 2022 to $1.6 billion, driven by net income. All regulatory capital ratios for both the company and its bank subsidiary significantly exceed the 'well-capitalized' thresholds, with a Common Equity Tier 1 (CET1) ratio of 11.2% for the company Available Liquidity Sources (September 30, 2023) (in thousands) | (in thousands) | Amount | | :--- | :--- | | Federal Reserve Bank borrowing capacity | $2,491,087 | | FHLB borrowing capacity | $945,086 | | Unpledged securities | $790,887 | | Federal funds lines | $120,000 | | Cash and interest-bearing deposits | $370,698 | | Total | $4,742,758 | Regulatory Capital Ratios (September 30, 2023) | Ratio | EFSC | Bank | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 11.2% | 12.1% | 6.5% | | Tier 1 Capital | 12.6% | 12.1% | 8.0% | | Total Capital | 14.1% | 13.1% | 10.0% | | Leverage Ratio | 10.9% | 10.5% | 5.0% | - The Tangible Common Equity to Tangible Assets ratio (non-GAAP) was 8.51% at September 30, 2023, compared to 8.43% at December 31, 2022181 Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk to optimize net interest income. As of September 30, 2023, simulation modeling indicates that a +100 basis point parallel rate shock would increase net interest income by 3.0% over the next 12 months, while a -100 basis point shock would decrease it by 3.2%. The company has transitioned from LIBOR to SOFR for new variable-rate loans and uses interest rate derivatives to hedge its exposure. The investment portfolio's unrealized losses of $343.8 million are primarily due to changes in interest rates Interest Rate Shock Impact on Net Interest Income (Sep 30, 2023) | Rate Shock | Annual % change in net interest income | | :--- | :--- | | +300 bp | 9.1% | | +200 bp | 6.1% | | +100 bp | 3.0% | | -100 bp | (3.2)% | | -200 bp | (6.6)% | | -300 bp | (10.0)% | - The company is managing the phase-out of LIBOR by selecting SOFR as the replacement index and ceased issuing new LIBOR-based contracts in December 2021189 - At September 30, 2023, the company had $6.5 billion in variable rate loans, of which $2.6 billion were indexed to SOFR and $277.5 million remained indexed to LIBOR190 Controls and Procedures Based on an evaluation as of September 30, 2023, the company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. There were no material changes to the company's internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023195 - No changes were made during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting196 PART II - OTHER INFORMATION Legal Proceedings The company and its subsidiaries are involved in various legal proceedings incidental to their business. Management believes that none of these proceedings, if determined adversely, would have a material adverse effect on the company's financial condition or results of operations - Management believes there are no pending or threatened legal proceedings that would have a material adverse effect on the Company's business, financial condition, or results of operations198 Risk Factors The company highlights a significant risk factor concerning adverse developments in the banking industry, such as recent high-profile bank failures. These events have eroded customer confidence, leading to market volatility and potential negative impacts on the company's liquidity, funding costs, and stock price. The speed of information dissemination through technology and social media can exacerbate these concerns - A key risk factor is that recent high-profile bank failures have eroded customer confidence in the banking system, which could materially impact the Company's operations, liquidity, cost of funding, and stock price201202 Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities There were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities during the period - None204